A rich life cycle model of labor supply in Finland

TL;DR

This paper develops a comprehensive life cycle model of labor supply tailored to Finland, capturing diverse employment states and analyzing policy reforms' impacts on employment and finances.

Contribution

It introduces a detailed heterogeneous life cycle model with extensive state space to accurately simulate Finnish labor market dynamics and policy effects.

Findings

Model reproduces Finnish employment and unemployment age structures.

Accurately matches distributions of tax rates and part-time work.

Analyzes impact of government reforms on employment and public finances.

Abstract

A life cycle model of consumption and labor supply describes employment decisions of a collection of individuals during their lifetime. We develop a life cycle model describing a heterogeneous population operating in Finland under a wide variety of employment states and life situations. A rich life cycle model requires a large state space representing the possible states of simulated agents. The results demonstrate that the model reproduces a number of statistics of the Finnish employment market such as the age structures of employment rate and unemployment rate, distributions of observed effective marginal tax rates and participating tax rates, and proportion of part time work. As an application of analysis of a reform, we analyze how the program of Orpo government influences employment and public finances in Finland.